Bearing Up in a Bear Market
We hope this note finds you and your loved ones doing well and enjoying the first few days of fall.
No bones about it: 2022 has been an extremely tough market year, and the latest downturn at the end of the third quarter pushed us into a bear market within the major stock indices. A bear market describes a prolonged drop in stock prices where the indices drop by 20% or more. Our advisors have lived through many different market cycles, from Y2K to the Dot-com bubble, September 11th to the Great Recession, Russia invading Crimea, Brexit, COVID, and the current period of high inflation. We have seen the markets swing from excessive enthusiasm to extreme pessimism. Through each of these periods, Wall Street has encouraged investors to make the decisions of six months ago – buying high and selling low, and staying out of the market as it begins to recover.
Studies have shown time and time again that timing the market is a fool’s errand, both in investing and in liquidating. We’ve seen this before, and our message is simple: stick to the plan, and let’s dictate your approach based on your needs.
Below, we’ve linked a chart from our partners at First Trust showing historical bull and bear markets since the 1940s. During that timeframe, the average bull market has lasted 52.8 months and the average bear market has lasted 11.1 months. Investors who sold at the bottom of a bear market missed out on the ensuing recovery.
In our recent newsletters, we’ve tried to provide an action item for those of you who like having something to do. Today, our recommendations relate to cash savings. While the Federal benchmark rate was recently raised to a target of 3.25%, this increase has not shown up in the interest rates paid by brick-and-mortar banks, who are averaging 0.16% per Bankrate’s October 5th survey of institutions.
A few potential spots to stash your cash are:
An online high-yield savings account, or HYSA. An online bank is still FDIC insured, but passes along the savings from not maintaining physical locations to its customers. Some of the most popular are Ally Bank at 2.25%, CapitalOne360 at 2.2%, and Marcus by Goldman Sachs at 2.15%. With cash savings of $50,000, this translates to an extra $1,045 a year in interest – not bad for money that’s federally insured and fully liquid.
If you have money geared toward a set time-frame and are willing to lock it up until then, newly issued CD rates have been climbing. A one year CD is paying well above 3%. Where it makes sense for clients, we have been laddering CDs over different timeframes to allow some liquidity. This is something I’d be happy to explore if you’re interested.
We had previously sent a newsletter discussing I Bonds, which are federally guaranteed and pegged to inflation. If you purchase prior to October 31st, you will get six months of 9.62% yield followed by six months of the next rate based on the CPI inflation metric, which is currently projected to be around 6%. Remember there are liquidity constraints here, as you cannot cash out bonds prior to holding them for one year, and when cashing out within five years you forfeit the most recent quarterly interest payment. I Bonds do not provide any real return above inflation, so are best suited to holding cash when you can’t get that interest rate elsewhere.
Please don’t hesitate to reach out if we can be of help.